Boards, not CEOs, must control the firm’s corporate destiny
In November 2000, I reviewed a book in the Inquirer titled “Who Leads the Corporation, the Board Chair or the CEO?” The featured book was “Taking Back the Boardroom,” published at the turn of the millennium in 2000.
That early, close on the heels of the collapse of revered corporations due to unchecked abuses or blunders of chief executive officers (CEOs), the author of “Taking Back the Boardroom,” Philip H. Phan, Ph.D., declared:
“Corporate governance experts are not keen on the idea of one individual holding both chair and CEO positions.” He added, “As mentor to the CEO, the chair has to set the performance standards by which the CEO will be judged.”
Almost 14 years after the book appeared, here comes a freshly-minted book, published this year 2014, providing more flesh and sinew—and muscle—to the idea that boards of directors must be equally active and aggressive as their appointed CEOs.
The subtitle of this new book, “Boards That Lead,” summarizes the expansive powers of the board of directors in any firm, including the power to limit itself by determining this: “When to take charge, when to partner, and when to stay out of the way.”
Where Phan of that 2000 book presented a persuasive argument to bring back the board to “active duty,” the Charan book provides both insights and cases that all the more convince all boards of directors in companies around the world to move two steps “from ceremonial to monitor and to leader.”
In times past, the board chair’s posts were reserved for retirees, enjoying honorific titles but not at all involved in the governance of companies. In the recent past, boards have served the role of “monitor”—watching and ratifying the “acts of management.” This is hardly the job of an active corporate leader!
And so, almost 14 years later, the idea of a stronger, more involved and more vigorous boards has been strengthened by several happy cases of corporate turnaround, simply because their respective boards took action on so important a matter like asking a “business icon” to return to Apple, after years earlier he had been eased out by the board then.
This chapter in the corporate history of America gives readers a front seat advantage how boards of the Fortune 500 firms have been saved from irretrievable collapse, and how a legendary CEO was brought back in harness for a multi-billion dollar business turnaround.
This is how Ram Charan narrated the story: “Apple board leader Edgar S. Woolard Jr. secured his directors’ agreement to bring Steve Jobs back to run the firm.” It could not have been an action initiated by the three Apple CEOs at the time.
The book details actions on “how the board of Procter & Gamble shaped its $54 billion takeover of Gillette; on Ford board leader Irvine O. Hockaday Jr. on the directors’ recruitment of a turnaround chief executive; and how Lenovo chair Liu Chuanzhi transformed his board to globalize the business.”
The book’s 11 chapters were clustered under three parts— namely: “Boards That Work,” “Leading the Leaders,” and “Value Creation.”
The authors advance the thesis that it is the board that must define the Central idea of a company. In earlier years when I was at graduate business school at the Asian Institute of Management (AIM), we were told that the first thing to establish in running a company is embedded in an all important question: “What business are we in?”
The book puts this truth more logically, with the touch of poetry: “The central idea of a corporation is the “seed that blossoms into a clear framing of the company’s full-blown strategy and the many implications for how to execute it.”
The authors wax eloquent: The central idea is “the animating force from which hundreds of strategic and operational details emanate. The central idea references why the company exists, whom it serves, how it should be nurtured.”
While offering many illustrations on the key role of boards that provide leadership, the book brings the reader up close to what they call the “centripetal DNA” that must be defined and led by such boards.
The story of Bharti Airtel founded by entrepreneur Sunil Bharti Mittal, exemplifies how the corporate leader formulates a strategy like “Grow faster than others; scale it up to become number one far ahead of the competitors.” Such declarations keep a company drawn to a magnet of a cluster of strategies—never going wayward.
So much unlike some companies, whose names were concealed, which took the destructive road of “centrifugal DNA,” which brought a company in massive and dizzying diversificatio—which, finally, led to confusion, quarreling directors of the board, and CEOs losing control.
Again, these accounts illustrate the valuable role of boards to control the overall direction and strategy of the company.
So, where does one draw the line between the role of the Board and that of the CEO? This topic is discussed at length in the chapter on “Staying out of the Way.” Two words are introduced into the discussion: “Governance” and “management.”
Governance belongs to the board, while management is the territory of the CEO. The book gives a word of caution: “Directors who wander too far into day-to-day operations where they have little expertise but strong opinions do an enterprise little good and can cause real damage.”
This means that the board and the CEO must join in a collaborative leadership to define the roles. The book has provided a list of where to draw the lines. There are land mines and there are beds of roses. “A board can be a destroyer or a creator of value,” the authors warn.
The cases of Lehman Brothers and AIG are discussed at length in this book, giving a lesson on how corporate boards and CEOs can lose control because they could not get their act together.
Two more nagging questions: What if there is a board director who acts like a loose cannon or who asserts toxic leadership in the company? The board’s majority members will have to force that director out.
What if the CEO shows signs of management failure? When the numbers don’t add up? When losses amount to billions of dollars? When market shrinks to something almost nil in a market the company once dominated? The book has prescribed steps how to give such a CEO the walking papers.
This is a must-read book for CEOs so they will know how to tap into the wellspring of visions and strategies from their boards. This also required for board chairs and directors who must know how to deal with an aggressive and persuasive CEO whose eloquence, at the end of the day, is not matched by positive result.
In brief, as the book says, corporate boards must exert their leadership in governance. When the CEO fails, such boards should have a mechanism for transition to the next CEO. After all, the boards represent the shareholders, and are mandated to control the firm’s corporate destiny. [email protected]